Cover of MoneyWeek magazine issue no 942, Friday 12 April 2019

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9 April 2019 / Issue 942

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Excerpt

John StepekEDITOR'S LETTER

John Stepek

Saudi Aramco, the giant oil company owned by the Saudi Arabian government, is the most profitable company in the world (that’s what happens when you produce 10% of the world’s oil and you’re able to pump it for less than $3 a barrel). It has a pristine balance sheet. It’s the kingdom’s corporate crown jewel.

However, the Saudis, under Crown Prince Mohammed bin Salman, have decided, correctly, that their economy is too dependent on oil, particularly in an era where the US has become a major energy rival. Bin Salman, under his “2030 vision” plan, wants to invest in building more sustainable, diverse income streams. But that takes a lot of money. And so, about three years ago, the decision was made to sell a small chunk of Saudi Aramco on the stockmarket.

Bankers licked their lips and rubbed their hands amid talk of a $2trn valuation. But almost immediately, it ran into problems. For a start, the Saudis only wanted to flog off 5% of the company, which clearly raises corporate governance concerns, even before one considers who the co-owners are. Secondly, that $2trn valuation – seen as non-negotiable by the Saudis, keen to raise $100bn in funding – was viewed as outrageously punchy by pretty much every potential investor.

So instead, the Saudis came up with a different wheeze. Saudi Aramco paid nearly $70bn to buy a 70% stake in Sabic, a petrochemical group that is owned by a Saudi sovereign wealth fund. This money will be used to fund the reform plan.

To fund the deal, Saudi Aramco decided to borrow money in the capital markets. Yield-starved investors saw a clean balance sheet plus loads of cash generation, and apparently decided it was a good bet. Saudi Aramco went looking for $10bn – and drew more than $100bn in bids, enabling it to borrow $12bn instead. In short, the Saudi state got its cash, without having to flog the family silver.

Some of you might well wonder at the audacity of the investment banks who helped Saudi Aramco to raise this money, having shunned the Saudis very publicly after the murder of journalist Jamal Khashoggi in October last year. And I did note this week in Money Morning (our free daily email – if you don’t already get it, sign up for it) that it’s ironic that at a time when financial services firms keep trying to sell us on the merits of environmental, social and governance (ESG) investing, the world’s biggest oil company, owned by one of the world’s most oppressive regimes, has managed to issue one of the most successful bond deals ever.

However, it’s not just the ethics of such a deal, but also the price that boggles the mind. Demand for Saudi Aramco debt was so high that it managed to borrow at an even lower rate than the Saudi government, which is odd, given how closely linked the two are. It’s another interesting side-effect of our quantitative-easing-addled world that a company whose finances depend on continued increases in the oil price – which is inflationary, certainly in the short run – should also be able to borrow at such a low cost in “real” (after-inflation) terms.

• The Sceptical Investor, John’s book on contrarian investing, is out now – MoneyWeek readers can get 25% off.